The political shakeup over the past 18 months or so has led to many questions around global trade (or the retreat from it), investment, and more broadly, the global macroeconomic environment. However, amidst all the changes that have been witnessed, strong economic growth in Asia has remained a promising constant.

As investors around the world take stock of the changes being seen globally, how is their perspective toward investing in Asia changing—if at all?

BRINK Asia spoke to Mercer’s global head of investment research, Deb Clarke, and Adeline Tan, the firm’s head of investment advisory in Hong Kong, about investors’ views on investment opportunities in Asia and some of the associated risks.

BRINK Asia: How will the global political shakeup impact Asia?

Deb Clarke: One of Mercer’s key themes for 2017 is fragmentation, particularly of the prevailing global political order. Populism has come to the fore in 2016 and has contributed to [President Donald] Trump’s election win as well as to the Brexit vote. It’s not a new phenomenon, but it has been building up over time.

For Asia, we could argue that the impact of fragmentation will be seen on globalization and free trade. If you assume that we have reached peak globalization, one of the challenges for Asia will be in terms of how they trade and whether current trade agreements will evolve and change. There will also be an impact on currencies, and emerging market currencies in particular could be challenged.

We are seeing reflation and global growth improving; so many Asian countries should benefit from that and be able to better weather political and currency uncertainty.

Adeline Tan: Locally, there’s a lot of discussion about where China is going to go from here. What the impact on China—given the developments in the West—will be, is the key. The main question in many Asia investors’ minds now is how the U.S. will cooperate with China, or not at all. India itself is also growing and we have seen that [Prime Minister] Narendra Modi has got a decisive win in Uttar Pradesh, which fosters confidence in stability in leadership. Modi has been open to the U.S., and it will be interesting to see if the U.S.-India relationship affects the deals to be done under the U.S.-China relationship.

BRINK Asia: What about an investment strategy under a low-yield market environment?

Clarke: The challenges of a low-return environment are global. Going forward clients will find it more difficult to achieve real returns of three to four percent, so they will need to review their options and look in areas they are less familiar with. One could argue that monetary stimulus has created an artificial environment for returns.

The markets have become more dispersed—if you are paying for active management, make sure you are not paying for Beta masquerading as Alpha. Complexity and illiquidity premiums are still available in private markets, and Asia offers an opportunity there. Asia also offers differentiated sources of Alpha generation; from a global perspective, people see opportunities for growth in Asia.

Tan: Hong Kong is a very open investment market—it’s transparent and it’s a frontrunner in terms of technology, enabling investments, and the like. While there [have] been a lot of concerns around the prevalence of Chinese influence in the local stock market since the start of 2016, at the same time, Hong Kong companies are quite international, and there are large multinationals [that] are domiciled here, so it continues to offer much opportunity. There is continued interest in the insurance, property and technology sectors. Separately, there has been a lot of interest around credit opportunities in ASEAN. I think the opportunities in Asia are very colorful and offer much to global investors.

Chinese investors may have been concerned earlier, but markets have been resilient despite geopolitical uncertainty.

BRINK Asia: Are we likely to continue seeing volatility in the financial markets?

Clarke: I guess one could ask whether the financial markets have actually been volatile in recent years. The VIX is low by historical standards—while the political uncertainties have increased towards at an all-time high; thereby creating a disconnect. Geopolitical risks have increased and the risk in markets is more on the downside as you look forward, so I would argue that the markets could be more volatile going forward. If downside volatility is a big concern for you as an investor, then hard and soft hedges should be considered to provide downside protection. Similarly, clients could invest in strategies where managers are flexible in their investment guidelines, and may invest in areas such as gold or cash if they are cautious on markets, but that would depend on their risk tolerance levels and objectives. But I expect there will be more volatility going forward than in the past few years.

Tan: Returns are harder to predict, while risks and volatility are easier to predict. We see the potential downside risks as significant—in this age of information technology, the actions of one person, individual, government or media outlet can really impact the market at one go. The known unknowns are how China is going to behave with the U.S.—how that relationship will mature; and the relationship between China and ASEAN is also sensitive at this point. What China does with its capital controls will also be watched. And finally, eyes are also on Japan, where [Prime Minister Shinzo] Abe is trying to change age-old norms. A lot depends on how successful he is.

BRINK Asia: What are some themes that will shape the Asian investment environment in the coming months?

Tan: Investors in Asia are still focused on yield. Sophisticated Chinese investors are actively looking into private infrastructure and private debt; we see the theme of hunting for yield is going to be around for the medium term.

The endowment-types are still looking for absolute returns, and they do not seem too perturbed about elections in the West going the way that markets or people aren’t predicting. They may have been concerned earlier, but we have seen that the markets have been resilient despite all of the geopolitical events unfolding. The recent themes raised are around emerging market bonds and local currency debt—we are seeing a lot of capital returning to the U.S., so many are looking more locally and closer to home. Real estate is a little bit of a downer at the moment, and private equity is popular because people are looking at high single-digit returns. For hedge funds, there is a view that opportunities are more liquid now than before.

BRINK Asia: We see a high level of savings in Asia. Why are these savings not finding their way to the capital markets?

Tan: The reason these savings are not following into the creation of new products is that the infrastructure and mind-set here [are] not ready for converting savings into long-term investments. A lot of products in Asia cannot be offered locally to investors because of regulations and the like. I think regulations and investment opportunities are important. Regulators here are more conservative, too, and take a while to allow new investment ideas and innovations to be offered to the end investor.  

The high savings ratio is generational and cultural, and I won’t be surprised that savings 20 years from now would be lower in real terms, while investments may not have increased proportionately, as the future generations are more likely to spend their money rather than save.  

BRINK Asia: What are a couple of the biggest challenges for investors looking to build a healthy portfolio of Asian assets?

Clarke: If you’re a global investor, some of the challenges you face when investing in Asia are around the practical aspects of factors such as currency and hedging. When investing in Asia you need to firstly understand why you are investing—is it for higher growth, different sources of growth or to gain access to specific world class companies? Then, in order to invest you need to think about the practical aspects, such as currency. For some investors actually creating a currency account, particularly in some countries, can be challenging, so they may choose to invest via pooled funds. Culturally, it is quite different here in Asia. Investors need to understand that the savings culture is different; the types of products available, including vehicles, may be different, but this creates the opportunity.

Tan: How do you get your money in, and how do you take it out? The illiquidity that Asia has as a group of markets is a big challenge, and we know even index-tracking managers are forced to adopt a sampling approach to adhere to regulations on their vehicle. A private fund debt manager, for instance, once told me that it will be a long time before they consider investing directly in private debt in Asia, besides Hong Kong or Singapore, because the laws are not in favor of the investors. Transparency around regulations is also a barrier to entry, so selecting good managers with the know-how [and] infrastructure to overcome or mitigate such risks will be important.

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